July 20, 2017 / 8:08 AM / 7 months ago

Fitch Affirms Zhuhai Huafa Group at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, July 20 (Fitch) Fitch Ratings has affirmed Zhuhai Huafa Group Co., Ltd.'s (Huafa) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB'. The Outlook is Stable. Fitch has also affirmed the CNY1.5 billion 5.25% senior unsecured bonds issued by Huarui Investment Holding Company Limited at 'BBB' and the USD300 million senior unsecured bonds issued by Huaxing Investment Holding Company Limited at 'BBB'. The two bond issues are unconditionally and irrevocably guaranteed by Huafa. KEY RATING DRIVERS Links to Zhuhai Municipality: Huafa's ratings are credit-linked but not equalised with Fitch's internal assessment of the creditworthiness of Zhuhai Municipality in southern China. This is reflected the entity's 100% state ownership, strong government oversight of its financials, and strategic importance of the entity's operation to the government. These factors result in a high likelihood Huafa would get extraordinary support from the government, if needed. Zhuhai's Creditworthiness: Zhuhai municipality has a satisfactory budget performance and diversified socio-economic profile. Several national-level economic zones, such as Zhuhai High-tech Industrial Development Zone and China (Guangdong) Pilot Free-Trade Zone, are located in the city and are the major drivers of economic development in the municipality. The strengths are partially mitigated by its relatively small economic size, and contingent liabilities arising from Zhuhai's state-owned entities. Legal Status Attribute at Mid-Range: Huafa is registered as a state-owned limited liability company under Chinese company law. It is allowed to go bankrupt and not all of its employees are civil servants. Strategic Importance Attribute at Stronger: As a major urban developer in Zhuhai, Huafa plays an important role in implementing the government's blueprint of urban planning and development. It takes a major role in assisting the municipality to develop large-scale urban development projects, such as the Shizimen Central Business District (SCBD) and social housing projects. Huafa also owns a majority share in Zhuhai Financial Investment - a key municipality-owned holding platform for investments in financial institutions and industrial equity. Control and Supervision Attribute at Stronger: Huafa is wholly owned by the Zhuhai Municipality. The company's directors and senior management are mainly appointed by the government, and its major decisions need the government's approval. The company's borrowings need approval from the government, which also closely monitors Huafa's liabilities. Integration Attribute at Mid-Range: Huafa received a CNY0.19 billion capital injection and CNY47 million in subsidies from the Zhuhai municipal government in 2016 to support its operation in urban infrastructure development. In addition, Huafa is authorised by the municipal government to conduct primary land development. The government's grant of primary land development rights to Huafa indirectly subsidises the company. Weak Financial Profile: The company's standalone credit profile is constrained by its relative high debt leverage. Its debt to EBITDA was at around 16x in 2016 and we forecast the ratio to remain at the current level in the next two to three years. The weak standalone credit profile is mitigated by its strategic links with the government, which may provide monetary and non-monetary support to the company. RATING SENSITIVITIES A stronger support commitment from Zhuhai Municipality may lead to positive rating action on Huafa. An upgrade of Fitch's internal assessment of the creditworthiness of Zhuhai Municipality would result in an upgrade of Huafa. Significant weakening of Huafa's strategic importance to Zhuhai Municipality, a dilution of the government's shareholding, or reduced explicit and implicit government support may lead to a downgrade. A downgrade could also stem from weaker fiscal performance or increased indebtedness of the government that causes our internal assessment of its creditworthiness to deteriorate. Contact: Primary Analyst Fan Gao Analyst +852 2263 9960 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Samuel Kwok Associate Director +852 2263 9961 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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